ENCISION INC 10-K

Item 8. Financial Statements and Supplementary Data The following financial statements are included in this Report: Page Report of Independent Registered Public Accounting Firm 25 Balance Sheets as of March 31, 2022 and 2021 27 Statements of Operations for the fiscal years ended March 31, 2022 and 2021 28 Statements of Shareholders' Equity for the fiscal years ended March 31, 2022 and 2021 29 Statements of Cash Flows for the fiscal years ended March 31, 2022 and 2021 30 Notes to Financial Statements 31 22 Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Encision Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Encision Inc. (the “Company”) as of March 31, 2022, and the related consolidated statement of operations, statements of stockholders’ deficit, and cash flows for each of the year then ended, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022, and the results of its operations and its cash flows for each of the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Inventories Critical Audit Matter Description The Company’s inventories consist of finished goods and raw materials, which are manufactured or purchased for use in the Company’s finished goods. The Company offers several different products to its customers. The cost of the inventory is a combination of raw materials, labor to convert those materials to components of the inventory and finished goods, and an allocation of overhead and related costs. The Company also prepares an obsolescence valuation at year end to properly record inventory at lower of cost or net realizable value. Significant judgment is exercised by the Company in determining the costs of inventory and includes the following: · Determination of which costs to include at each manufacturing phase, including overhead allocation and materials used for production and finished goods. 23 · Identification of Inventory on hand and any obsolescence reserve or write-offs determined based on usability of inventory on hand. Given the inherent uncertainty in forecasting product demand, including the impact of product releases, auditing the reasonableness of management’s estimated and assumptions related to inventory reserve required a high degree of auditor judgement and an increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures related to the Company's inventory included the following: · We evaluated management’s significant accounting policies related to inventory for reasonableness. · We selected a sample of finished goods and raw materials and performed detailed testing over the items selected, including but not limited to the following: o Agreed the bill of materials source documents for each selection, including invoice, labor and overhead allocations, and any other items relevant to price verification o Tested managements identification and application of inventory costs for components and finished goods o Performed a physical inventory count as of year-end and tested the reconciliation of quantities on hand to the inventory listing, performing both existence and completeness testing. o Assessed the reasonableness of costs and the appropriate application of managements significant accounting policies related to Inventory, including determination of inventory obsolescence reserve. Emphasis of Matters-Risks and Uncertainties The Company is not able to predict the ultimate impact that COVID -19 will have on its business. However, if the current economic conditions continue, the pandemic could have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company plans to operate. /s/ Gries & Associates, LLC We have served as the Company’s auditor since 2022. PCAOB ID: 6778 Denver, CO July 12, 2022 24 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Encision Inc. Boulder, Colorado Opinion on the Financial Statements We have audited the accompanying balance sheet of Encision Inc. as of March 31, 2021 and the related statements of operations , shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Encision Inc. as of March 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Encision Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Encision Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. 25 Inventory Valuation As discussed in Note 1 of the financial statements, the Company’s balance of inventory was $1,445,134 as of March 31, 2021. The valuation of inventories requires management to make significant assumptions and complex judgments about the future salability of the inventory and its net realizable value. These assumptions include the assessment of net realizable value by inventory category considering future usage and market demand for their products. Additionally, management makes qualitative judgments related to discontinued, slow moving and obsolete inventories. We identified inventory valuation as a critical audit matter. Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed. The primary procedures we performed to address this critical audit matter included: · Gaining an understanding of management’s process and methodology to develop the estimates. · Evaluating the reasonableness of the significant assumptions used by management including those related to inventory usage. · Evaluating management’s historical ability to forecast sales for inventory and to identify slow moving inventory. · Comparing management’s assertions regarding future product sales to communication between management and the board of directors. · Testing the completeness, accuracy and relevance of the underlying data used in management’s estimate. · Performing inquiries with appropriate non-financial personnel, including sales and production employees, regarding obsolete or discontinued inventory models, cancelled sales orders and other factors to corroborate management’s assertions regarding qualitative judgments about discontinued, slow moving and obsolete inventory. /s/ Eide Bailly LLP We have served as the Company’s auditor since 2008. Denver, Colorado June 23, 2021 286 26 Encision Inc. Balance Sheets March 31, 2022 March 31, 2021 ASSETS Current assets: Cash $ 949,645 $ 1,474,339 Accounts receivable, net of allowance for doubtful accounts of $ 0 at March 31, 2022 and $ 35,000 at March 31, 2021 947,623 1,024,370 Inventories, net of reserve for obsolescence of $ 36,000 at March 31, 2022 and $ 70,000 at March 31, 2021 1,584,321 1,445,134 Prepaid expenses and other assets 120,133 154,151 Total current assets 3,601,722 4,097,994 Equipment: Furniture, fixtures and equipment, at cost 2,468,949 2,695,297 Accumulated depreciation ( 2,279,652 ) ( 2,429,580 ) Equipment, net 189,297 265,717 Right of use asset 786,407 1,060,971 Patents, net of accumulated amortization of $ 282,081 at March 31, 2022 and $ 317,822 at March 31, 2021 180,719 213,368 Other assets 34,240 20,496 TOTAL ASSETS $ 4,792,385 $ 5,658,546 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 576,381 $ 389,088 Line of credit — — Secured notes 21,491 20,397 Accrued compensation 190,853 181,686 Other accrued liabilities 125,179 282,102 Accrued lease liability 362,487 302,978 Total current liabilities 1,276,391 1,176,251 Long-term liability: Secured notes 205,809 220,263 Accrued lease liability 564,321 926,808 Unsecured promissory note — 533,118 Total liabilities 2,046,521 2,856,440 Commitments and contingencies (Note 4) Shareholders’ equity: Preferred stock, no par value: 10,000,000 shares authorized; none issued and outstanding — — Common stock and additional paid-in capital, no par value: 100,000,000 shares authorized; 11,719,543 issued and outstanding at March 31, 2022 and 11,582,641 at March 31, 2021 24,275,183 24,265,831 Accumulated (deficit) ( 21,529,319 ) ( 21,463,725 ) Total shareholders’ equity 2,745,864 2,802,106 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 4,792,385 $ 5,658,546 The accompanying notes to financial statements are an integral part of these statements. 27 Encision Inc. Statements of Operations Years Ended March 31, 2022 March 31, 2021 NET REVENUE: Product $ 6,914,678 $ 7,010,657 Service 753,958 527,177 Total revenue 7,668,636 7,537,834 COST OF REVENUE: Product 3,509,158 3,375,307 Service 371,060 257,424 Total cost of revenue 3,880,218 3,632,731 GROSS PROFIT 3,788,418 3,905,103 OPERATING EXPENSES: Sales and marketing 2,084,110 2,020,435 General and administrative 1,381,087 1,376,767 Research and development 918,155 569,542 Total operating expenses 4,383,352 3,966,744 OPERATING (LOSS) ( 594,934 ) ( 61,641 ) OTHER INCOME (EXPENSE): Interest expense, net ( 7,224 ) ( 87,127 ) Extinguishment of debt income 533,118 598,567 Other income, net 3,446 134,935 Interest expense, extinguishment of debt income and other income, net 529,340 646,375 INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES ( 65,594 ) 584,734 Provision for income taxes — — NET INCOME (LOSS) $ ( 65,594 ) $ 584,734 Net income (loss) per share—basic and diluted $ ( 0.01 ) $ 0.05 Weighted average shares—basic 11,625,118 11,582,641 Weighted average shares—diluted 11,625,118 11,767,997 The accompanying notes to financial statements are an integral part of these statements. 28 Encision Inc. Statements of Shareholders’ Equity Shares of Common Stock Common Stock and Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity BALANCES AT MARCH 31, 2020 11,582,641 $ 24,232,477 $ ( 22,048,459 ) $ 2,184,018 Net income — — 584,734 584,734 Compensation expense related to equities — 33,354 — 33,354 BALANCES AT MARCH 31, 2021 11,582,641 $ 24,265,831 $ ( 21,463,725 ) $ 2,802,106 Net loss — — ( 65,594 ) ( 65,594 ) Compensation expense related to equities — 40,853 — 40,863 Options exercised 136,902 ( 31,501 ) ( 31,511 ) BALANCES AT MARCH 31, 2022 11,719,543 $ 24,275,183 $ ( 21,529,319 ) $ 2,745,864 The accompanying notes to financial statements are an integral part of these statements. 29 Encision Inc. Statements of Cash Flows Years Ended March 31, 2022 March 31, 2021 Cash flows (used in) from operating activities: Net (loss) income $ ( 65,594 ) $ 584,734 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Extinguishment of debt income ( 533,118 ) ( 598,567 ) Write-off of tooling 31,000 — Depreciation and amortization 113,470 88,955 Stock-based compensation expense related to stock options 40,853 33,354 (Recovery from) provision for doubtful accounts, net change ( 35,000 ) ( 23,000 ) Provision for (recovery from) for inventory obsolescence, net change ( 34,000 ) 31,000 Other income from release of account payable — ( 56,435 ) Change in operating assets and liabilities: Right of use asset, net ( 28,414 ) 63,169 Accounts receivable 163,456 ( 120,176 ) Inventories ( 105,187 ) 149,767 Prepaid expenses and other assets ( 31,435 ) ( 82,460 ) Accounts payable 187,293 700 Accrued compensation and other accrued liabilities ( 147,756 ) 148,905 Net cash (used in) provided by operating activities ( 444,432 ) 219,946 Cash flows (used in) investing activities: Acquisition of property and equipment ( 17,550 ) ( 30,020 ) Patent costs ( 17,851 ) ( 15,166 ) Net cash (used in) investing activities ( 35,401 ) ( 45,186 ) Cash flows from (used in) financing activities: (Paydown of) borrowings from credit facility, net change — ( 370,498 ) Proceeds from secured notes — 153,260 (Paydown of) secured notes ( 13,360 ) — Net payments from exercise of stock options ( 31,501 ) — Proceeds from PPP loans — 1,131,685 Net cash (used in) provided by financing activities ( 44,861 ) 914,447 Net (decrease) increase in cash ( 524,694 ) 1,089,207 Cash, beginning of fiscal year 1,474,339 385,132 Cash, end of fiscal year $ 949,645 $ 1,474,339 Supplemental disclosure of non-cash investing activity information: Acquisition of property and equipment through secured note payable — $ 87,400 Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 7,224 $ 80,251 The accompanying notes to financial statements are an integral part of these statements. 30 ENCISION INC. NOTES TO FINANCIAL STATEMENTS 1. Description of Business and Basis of Presentation Encision Inc. is a medical device company that designs, develops, manufactures and markets patented surgical instruments that provide greater safety to patients undergoing minimally-invasive surgery. We believe that our patented AEM ® surgical instrument technology is changing the marketplace for electrosurgical devices and instruments by providing a solution to a well-documented risk in laparoscopic surgery. Our sales to date have been made primarily in the United States. We have an accumulated deficit of $ 21,529,319 at March 31, 2022. Operating funds have been provided primarily by issuances of our common stock and warrants, the exercise of stock options to purchase our common stock, loans, and by operating profits. Our liquidity has diminished because of prior years’ operating losses, and we may be required to seek additional capital in the future. Our strategic marketing and sales plan is designed to expand the use of our products in surgically active hospitals in the United States. We had (net loss) and net income available to shareholders of $( 65,594 ) and $ 584,734 for the fiscal years ended March 31, 2022 and 2021, respectively. At March 31, 2022, we had $ 949,645 in cash available to fund future operations, and outstanding borrowings of $ 227,300 . In February 2021, we entered into an unsecured promissory note under the PPP for a principal amount of $ 533,118 . The PPP was established under the congressionally approved CARES Act. The term of the PPP loan is for 2 two years with an interest rate of 1.0 % per year, which will be deferred for the first six months of the term of the loan. After the initial six-month deferral period, the loan requires monthly payments of principal and interest until maturity with respect to any portion of the PPP loan which is not forgiven. Under the terms of the CARES Act, a PPP loan recipient may apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. During the quarter ended September 30, 2021 we achieved the requirements for forgiveness of the loan and recognized extinguishment of debt income. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. 2. Summary of Significant Accounting Policies Use of Estimates in the Preparation of Financial Statements . The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expense during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, we consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. Fair Value of Financial Instruments . Our financial instruments consist of cash, cash equivalents, short-term trade receivables, payables, line of credit, PPP loan, Economic Injury Disaster Loan (“EIDL”) loan and secured notes. The carrying values of cash, cash equivalents, trade receivables, payables, line of credit approximate their fair value due to their short maturities. The fair values of the EIDL Loan approximates the carrying value based on estimated discounted future cash flows using the current rates at which similar loans would be made. Concentration of Credit Risk . Financial instruments, which potentially subject us to concentrations of credit risk, consist of cash and cash equivalents, and accounts receivable. The carrying value of all financial instruments approximates fair value. The amount of cash on deposit with financial institutions occasionally exceeds the $ 250,000 federally insured limit at March 31, 2022. However, we believe that cash on deposit that exceeds $ 250,000 in the financial institutions is financially sound and the risk of loss is minimal. We have no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. We maintain the majority of our cash balances with one financial institution in the form of demand deposits. 31 Accounts receivable are typically unsecured and are derived from transactions with and from entities in the healthcare industry primarily located in the United States. Accordingly, we may be exposed to credit risk generally associated with the healthcare industry. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We charge interest on past due accounts on a case-by-case basis. A summary of the activity in our allowance for doubtful accounts is as follows: Summary of the activity in allowance for doubtful accounts Years Ended March 31, 2022 March 31, 2021 Balance, beginning of year $ 35,000 $ 58,000 Provision for (recoveries of) estimated losses ( 33,910 ) ( 16,322 ) Write-off of uncollectible accounts ( 1,090 ) ( 6,678 ) Balance, end of year $ 0 $ 35,000 The net accounts receivable balance at March 31, 2022 of $ 947,623 included no more than 8% from any one customer. The net accounts receivable balance at March 31, 2021 of $ 1,024,370 included no more than 14% from any one customer. Warranty Accrual . We provide for the estimated cost of product warranties at the time sales are recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is based upon historical experience and is also affected by product failure rates and material usage incurred in correcting a product failure. Should actual product failure rates or material usage costs differ from our estimates, revisions to the estimated warranty liability would be required. There was no warranty accrual at March 31, 2022. Inventories . Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At March 31, 2022 and 2021, inventory consisted of the following: Schedule of inventory March 31, 2022 March 31, 2021 Raw materials $ 1,083,387 $ 1,038,094 Finished goods 536,934 477,040 Total gross inventories 1,620,321 1,515,134 Less reserve for obsolescence ( 36,000 ) ( 70,000 ) Total net inventories $ 1,584,321 $ 1,445,134 A summary of the activity in our inventory reserve for obsolescence is as follows: Summary of the activity in inventory reserve for obsolescence Years Ended March 31, 2022 March 31, 2021 Balance, beginning of year $ 70,000 $ 39,000 Provision for estimated obsolescence 17,578 31,528 Write-off of obsolete inventory ( 51,578 ) ( 528 ) Balance, end of year $ 36,000 $ 70,000 Property and Equipment . Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally three to seven years. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized. Depreciation expense for the years ended March 31, 2022 and 2021 was $ 62,970 and $ 58,861 , respectively. Long-Lived Assets . Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell. 32 Patents . The costs of applying for patents are capitalized and amortized on a straight-line basis over the lesser of the patent’s economic or legal life (20 years from the date of application in the United States). Capitalized costs are expensed if patents are not issued. We review the carrying value of our patents periodically to determine whether the patents have continuing value and such reviews could result in the conclusion that the recorded amounts have been impaired. A summary of our patents at March 31, 2022 and 2021 is as follows: Summary of patents March 31, 2022 March 31, 2021 Patents issued $ 496,901 $ 496,901 Write off of obsolete patents ( 86,239 ) — Accumulated amortization ( 265,762 ) ( 308,155 ) Patents issued, net of accumulated amortization 144,900 188,746 Patent applications 52,138 34,288 Accumulated amortization ( 16,319 ) ( 9,666 ) Patent applications, net of accumulated amortization 35,819 24,622 Total net patents and patent applications $ 180,719 $ 213,368 The expected annual amortization expense related to patents and patent applications as of March 31, 2022, for the next five fiscal years, is as follows: Schedule of expected annual amortization expense related to patents and patent applications for the next five fiscal years Fiscal Year Amount 2023 $ 25,597 2024 23,788 2025 22,884 2026 21,929 2027 21,112 Thereafter 65,409 Total $ 180,719 Other Accrued Liabilities . At March 31, 2022 and 2021, other accrued liabilities consisted of the following: Schedule of other accrued liabilities March 31, 2022 March 31, 2021 Bonus $ — $ 95,795 Sales commissions 29,157 45,370 Sales and use tax 13,967 15,065 Marketing fees 15,735 15,330 Payroll taxes, payroll 53,998 93,857 Miscellaneous 12,322 16,685 Total other accrued liabilities $ 125,179 $ 282,102 Income Taxes . We account for income taxes under the provisions of ASC Topic 740, “Accounting for Income Taxes” (“ASC 740”). ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. ASC 740 also requires recognition of deferred tax assets for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. Should we achieve sufficient, sustained income in the future, we may conclude that some or all of the valuation allowance should be reversed (Note 5). ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. 33 The cumulative effect of adopting ASC 740 on April 1, 2007 has been recorded net in deferred tax assets, which resulted in no ASC 740 liability on the balance sheet. The total amount of unrecognized tax benefits as of the date of adoption was zero. There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit the Company’s tax returns from fiscal year ended March 31, 2021 through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the statements of operations. There have been no income tax related interest or penalties assessed or recorded. Because the Company has provided a full valuation allowance on all of its deferred tax assets, the adoption of ASC 740 had no impact on our effective tax rate. Revenue Recognition . We record revenue at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business processes, policies, systems and controls to support recognition and disclosure. Our shipping policy is FOB Shipping Point. We recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims. We have no ongoing obligations related to product sales, except for normal warranty obligations. As presented on the Statement of Operations our revenue is disaggregated between product revenue and service revenue. As it relates specifically to product revenue, we do not believe further disaggregation is necessary as substantially all of our product revenue comes from multiple products within a line of medical devices. Our engineering service contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. Sales Taxes . We collect sales tax from customers and remit the entire amount to each respective state. We recognize revenue from product sales net of sale taxes. Research and Development Expenses . We expense research and development costs for products and processes as incurred. Advertising Costs . We expense advertising costs as incurred. Advertising expense for the years ended March 31, 2022 and 2021 was minimal. Stock-Based Compensation . Stock-based compensation is presented in accordance with the guidance of ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statements of operations. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the accompanying statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in our statements of operations for fiscal years 2022 and 2021 included compensation expense for share-based payment awards granted prior to, but not yet vested as of March 31, 2022, based on the grant date fair value. Compensation expense for all share-based payment is recognized using the straight-line, single-option method. As stock-based compensation expense recognized in the accompanying statements of operations for fiscal years 2022 and 2021 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We used the Black-Scholes option-pricing model (“Black-Scholes model”) to determine fair value. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. Stock-based compensation expense recognized under ASC 718 for fiscal years 2022 and 2021 was $ 40,853 and $ 33,354 , respectively, which consisted of stock-based compensation expense related to director and employee stock options. 34 Stock-based compensation expense related to director and employee stock options under ASC 718 for fiscal years 2022 and 2021 was allocated as follows: Schedule of stock-based compensation expense related to employee stock options Years Ended March 31, 2022 March 31, 2021 Cost of sales $ 619 $ 3,669 Sales and marketing 6,067 4,871 General and administrative 30,955 22,632 Research and development 3,212 2,182 Stock-based compensation expense $ 40,853 $ 33,354 Segment Reporting . We have concluded that we have two operating segments, product and service. Product designs, develops, manufactures and markets patented surgical instruments. Service performs electrical engineering activities for external entities. Schedule of service performs electrical engineering activities for external entities Year Ended March 31, 2022 Year Ended March 31, 2021 Product Service Total Product Service Total Net revenue $ 6,914,678 $ 753,958 $ 7,668,636 $ 7,010,657 $ 527,177 $ 7,537,834 Cost of revenue 3,509,158 371,060 3,880,218 3,375,307 257,424 3,632,731 Gross profit 3,405,520 382,898 3,788,418 3,635,350 269,753 3,905,103 Operating income (loss) ( 977,832 ) 382,898 ( 594,934 ) ( 357,248 ) 269,753 ( 61,641 ) Depreciation and amortization 113,470 — 113,470 88,955 — 88,955 Capital expenditures 17,550 — 17,550 117,420 — 117,420 Equipment and patents, net $ 370,016 $ — $ 370,016 $ 479,085 $ — $ 479,085 Basic and Diluted Income per Common Share . Net income per share is calculated in accordance with ASC Topic 260, "Earnings Per Share" ("ASC 260"). Under the provisions of ASC 260, basic net income per common share is computed by dividing net income for the period by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. Because we had a loss in fiscal year 2022, the shares used in the calculation of dilutive potential common shares exclude options to purchase shares. The following table presents the calculation of basic and diluted net income (loss) per share: Schedule of calculation of basic and diluted net income (loss) per share Years Ended March 31, 2022 March 31, 2021 Net income (loss) $ ( 65,594 ) $ 584,734 Weighted-average shares — basic 11,625,118 11,582,641 Effect of dilutive potential common shares — 185,356 Weighted-average shares — basic and diluted 11,625,118 11,767,997 Net loss per share — basic and diluted $ ( 0.01 ) $ 0.05 Antidilutive equity units 1,061,000 850,644 Recent Accounting Pronouncements . In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, excluding smaller reporting entities, which will be effective for fiscal years beginning after December 15, 2023. We will adopt ASU 2016-13 beginning April 1, 2023 and do not expect the application of the CECL impairment model to have a significant impact on our allowance for uncollectible amounts for accounts receivable . 35 3. Shareholders’ Equity Stock Option Plans. We have a stock option plan, the 2007 Stock Option Plan, and we adopted our 2014 Equity Incentive Plan (the “Plan,” as summarized below) to promote our and our shareholders’ interests by helping us to attract, retain and motivate our key employees and associates. Under the terms of the Plan, the Board of Directors may grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other stock-based awards. The purchase price of the shares subject to a stock option will be the fair market value of our common stock on the date the stock option is granted. Generally, vesting of stock options occurs such that 20% becomes exercisable on each anniversary of the date of grant for each of the five years following the grant date of such option. Generally, all stock options must be exercised within five years from the date granted. The number of common shares reserved for issuance under the Plan is 1,100,000 shares of common stock, subject to adjustment for dividend, stock split or other relevant changes in our capitalization. Under ASC 718, the value of each employee stock option was estimated on the date of grant using the Black-Scholes model for the purpose of financial information in accordance with ASC 718. The use of a Black-Scholes model requires the use of actual employee exercise behavior data and the use of a number of assumptions including expected volatility, risk-free interest rate and expected dividends. Employee stock options for 270,000 and 110,000 shares of stock were granted during fiscal years 2022 and 2021, respectively. As of March 31, 2022, $ 194,000 of total unrecognized compensation costs related to nonvested stock is expected to be recognized over a period of five years. The assumptions for employee stock options are summarized as follows: Summary of assumptions for employee stock options Years Ended March 31, 2022 March 31, 2021 Risk-free interest rate 0.8 % to 1.05 % 0.3 % to 0.4 % Expected life (in years) 5.0 5.0 Expected volatility 69 % to 76 % 87 % Expected dividend 0 % 0 % Cumulative compensation cost recognized in net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of compensation expense in the period of forfeiture. The volatility of the stock is based on the historical volatility for the period that approximates the expected lives of the options being valued. Fair value computations are highly sensitive to the volatility factor; the greater the volatility, the higher the computed fair value of options granted. The total fair value of options granted was computed to be approximately $ 213,000 and $ 40,000 , for the fiscal years ended March 31, 2022 and 2021, respectively. For disclosure purposes, these amounts are amortized ratably over the vesting periods of the options. Effects of stock-based compensation, net of the effect of forfeitures, totaled $ 40,853 and $ 33,354 for fiscal years 2022 and 2021, respectively. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the use of assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. A summary of our stock option activity and related information for equity compensation plans approved by security holders for each of the fiscal years ended March 31, 2022 and 2021 is as follows: Summary of stock option activity and related information for equity compensation plans STOCK OPTIONS OUTSTANDING Number Outstanding Weighted-Average Exercise Price per Share BALANCE AT MARCH 31, 2020 754,000 $ 0.39 Granted 110,000 0.54 Forfeited/expired ( 72,000 ) 0.51 BALANCE AT MARCH 31, 2021 792,000 $ 0.40 Granted 270,000 1.36 Exercised ( 136,902 ) 0.32 Forfeited/expired ( 108,098 ) 0.27 Reclassified 244,000 0.52 BALANCE AT MARCH 31, 2022 1,061,000 $ 0.65 36 A summary of our stock option activity and related information for equity compensation plans not approved by security holders for the fiscal year ended March 31, 2022 is as follows: Summary of RSU activity and related information for equity compensation plans STOCK OPTIONS OUTSTANDING Number Outstanding Weighted-Average Exercise Price per Share BALANCE AT MARCH 31, 2020 244,000 $ 0.52 Forfeited/expired 0 $ 0.00 BALANCE AT MARCH 31, 2021 244,000 $ 0.52 Reclassified ( 244,000 ) $ 0.52 BALANCE AT MARCH 31, 2022 — $ 0.00 The following table summarizes information about employee stock options outstanding and exercisable at March 31, 2022: Summary of information about employee stock options outstanding and exercisable STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE Range of Exercise Prices Number Outstanding Weighted-Average Remaining Contractual Life (in Years) Weighted-Average Exercise Price per Share Number Exercisable Weighted-Average Exercise Price per Share $0.32 - $0.35 320,000 2.0 $ 0.34 207,242 $ 0.34 $0.38 - $0.50 421,000 1.6 $ 0.43 317,503 $ 0.43 $0.54 - $1.40 320,000 4.4 $ 1.24 18,144 $ 0.55 1,061,000 2.6 $ 0.65 542,889 $ 0.40 The 1,061,000 options outstanding as of March 31, 2022 are nonqualified stock options. The exercise price of all options granted through March 31, 2022 has been equal to or greater than the fair market value, as determined by our Board of Directors or based upon publicly quoted market values of our common stock on the date of the grant. 4. Commitments and Contingencies We have a noncancelable lease agreement for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease expires October 31, 2024. On April 1, 2021, we adopted Accounting Standards Codification (“ASC”) ASC 842 “Leases” using the initial date of adoption method, whereby the adoption does not impact any periods prior to April 1, 2019. ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases’ guidance. We recorded an operating Right of Use (“ROU”) asset of $ 1,555,150 , and an operating lease liability of $ 1,619,842 as of April 1, 2019. The difference between the initial operating ROU asset and operating lease liability of $ 64,692 is accrued rent previously recorded under ASC 840. We elected to adopt the package of practical expedients and, accordingly, did not reassess any previously expired or existing arrangements and related classifications under ASC 840. If the rate implicit in the lease is not readily determinable, we use our incremental borrowing rate as the discount rate. We use our best judgement when determining the incremental borrowing rate, which is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term to the lease payments. 37 Our operating lease includes the use of real property. We have not identified any material finance leases as of March 31, 2022. For the years ended March 31, 2022 and 2021, we had $ 357,644 and $ 322,961 , respectively, for lease expense. The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of March 31, 2022: Schedule of operating lease payment Fiscal Year Amount 2023 $ 372,167 2024 386,667 2025 232,139 Total operating lease payments 990,973 Less imputed interest ( 64,165 ) Total operating lease liabilities $ 926,808 Weighted-average remaining lease term 2.5 years Weighted-average discount rate 5.0 % During January 2021, we canceled our relationship with Crestmark Bank. We had no borrowings and incurred a $20,000 exit fee. On August 4, 2020, we received $ 150,000 in loan funding from the U.S. Small Business Administration (“SBA”) under the Economic Injury Disaster Loan (“EIDL”) program administered by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note, dated August 1, 2020 in the original principal amount of $ 150,000 with the SBA, the lender. Under the terms of the Note, interest accrues on the outstanding principal at the rate of 3.75 % per annum. The term of the Note is thirty years, though it may be payable sooner upon an event of default under the Note. Under the Note, we will be obligated to make equal monthly payments of principal and interest of $774 beginning on August 1, 2023 through the maturity date of August 1, 2050. The Note may be prepaid in part or in full, at any time, without penalty. During January 2021, we entered into a note agreement with U.S. Bank for $92,000. The note is for five years at a 5% interest rate and the proceeds were used to purchase equipment. The note is secured by the equipment. On April 17, 2020, we entered into an unsecured promissory note under the PPP for a principal amount of $ 598,567 . The PPP was established under the Consolidated Appropriations Act of 2020, enacted December 27, 2020. Under the terms of the CARES Act, a PPP loan recipient may apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined based upon the use of loan proceeds for payroll costs, rent and utility costs, and the maintenance of employee and compensation levels. In the quarter that ended December 31, 2020, we achieved the requirements for forgiveness, and all of the $598,567 was forgiven. We recognized the forgiveness as extinguishment of debt income of $ 598,567 .On February 8, 2021, we entered into a second unsecured promissory note under the PPP for a principal amount of $ 533,118 . This was our second PPP loan. During the quarter that ended September 30, 2021, we achieved the requirements for forgiveness of the second note and recognized the forgiveness as extinguishment of debt income of $ 533,118 . The minimum future EIDL payment, by fiscal year, as of March 31, 2022 is as follows: Schedule of EIDL payment Fiscal Year Amount 2023 1,997 2023 3,091 2024 3,208 2025 3,331 2026 3,457 Thereafter 136,916 Total $ 152,000 The minimum future U.S. Bank payment, by fiscal year, as of March 31, 2022 is as follows: Schedule of principal U.S. Bank payment Fiscal Year Amount 2023 18,400 2023 18,400 2024 18,400 2025 18,400 2026 15,060 Total $ 88,660 We are subject to regulation by the United States Food and Drug Administration (“FDA”). The FDA provides regulations governing the manufacture and sale of our products and regularly inspects us and other manufacturers to determine our and their compliance with these regulations. As of March 31, 2022, we believe we were in substantial compliance with all known regulations. FDA inspections are conducted periodically at the discretion of the FDA. We were last inspected in October 2019. Our obligation with respect to employee severance benefits is minimized by the “at will” nature of the employee relationships. Our total obligation with respect to contingent severance benefit obligations was none as of March 31, 2022 and 2021. 38 5. Income Taxes We account for income taxes under ASC 740, which requires the use of the liability method. ASC 740 provides that deferred income tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred income tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred income tax assets and liabilities are expected to be settled or realized. Income tax provision (benefit) for income taxes is summarized below: Schedule of components of income tax expense (benefit) Years Ended March 31, 2022 March 31, 2021 Current: Federal $ — $ — State — — Total current — — Deferred: Federal ( 52,000 ) 228,000 State ( 10,000 ) 44,000 Total deferred ( 62,000 ) 272,000 Valuation allowance 62,000 ( 272,000 ) Total $ — $ — The following is a reconciliation between the effective rate and the federal statutory rate: Schedule of Effective Income Tax Rate Reconciliation Years Ended March 31, 2022 March 31, 2021 Expected income tax rate $ ( 14,000 ) $ 123,000 State income taxes, net of federal tax benefit ( 3,000 ) 23,000 PPP forgiveness ( 133,000 ) ( 150,000 ) Other permanent differences 10,000 1,000 Research credits ( 9,000 ) ( 40,000 ) Change in valuation allowance 149,000 43,000 Income tax expense $ — $ — The components of the net accumulated deferred income tax asset (liability) are as follows: Schedule of components of the deferred tax asset Years Ended March 31, 2022 March 31, 2021 Other deferred assets $ 58,000 $ 148,000 Valuation allowance ( 58,000 ) ( 148,000 ) Current deferred tax assets — — Credits and net operating loss carryforwards 2,303,000 2,151,000 Valuation allowance ( 2,303,000 ) ( 2,151,000 ) Long-term deferred tax assets — — Total deferred tax assets — — Valuation allowance — — Long-term deferred tax liabilities — — Total deferred tax liabilities — — Net deferred tax assets (liabilities) $ — $ — 39 The primary components of our deferred tax assets are described below: Years Ended March 31, 2022 March 31, 2021 Differences in reporting long-term assets $ 58,000 $ 148,000 Credits and net operating loss carryforwards 2,303,000 2,151,000 Less valuation allowance ( 2,361,000 ) ( 2,299,000 ) Total deferred tax assets $ — $ — In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which net operating losses and reversal of timing differences may offset taxable income. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to our lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. As of March 31, 2022, we had approximately $ 7.7 million of net operating loss carryovers for tax purposes. Additionally, we have approximately $ 376,000 of research and development tax credits available to offset future federal income taxes. The net operating loss and credit carryovers begin to expire in the fiscal year ended March 31, 2023. In fiscal years ended after March 31, 2023, net operating losses expire at various dates through March 31, 2041 . Our net operating loss carryovers at March 31, 2022 include $455,000 in income tax deductions related to stock options which will be tax effected and the benefit will be reflected as a credit to additional paid-in capital when realized. As such, these deductions are not reflected in our deferred tax assets. The Internal Revenue Code contains provisions, which may limit the net operating loss carryforwards available to be used in any given year if certain events occur, including significant changes in ownership interests. 6. Major Customers/Suppliers We depend on sales that are generated from hospitals’ ongoing usage of AEM surgical instruments. In fiscal year 2022, we generated sales from over 300 hospitals that have changed to AEM products. Auris Health contributed 10 % to the total sales. Three vendors accounted for approximately 47 % of our inventory purchases. 7. Defined Contribution Employee Benefit Plan We have adopted a 401(k) Profit Sharing Plan which covers all full-time employees who have completed at least three months of full-time continuous service and are age eighteen or older. Participants may defer up to 20% of their gross pay up to a maximum limit determined by law. Participants are immediately vested in their contributions. We may make discretionary contributions based on corporate financial results for the fiscal year. To date, we have not made contributions to the 401(k) Profit Sharing Plan. Vesting in a contribution account (our contribution) is based on years of service, with a participant fully vested after five years of credited service. 8. Related Party Transaction We paid consulting fees of $ 71,908 and $ 66,003 to an entity owned by one of our directors in fiscal years 2022 and 2021, respectively. 9. Subsequent Events Except for the item that follows, management evaluated all of our activity and concluded that, as of the date the financial statements were issued, no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements. On August 23, 2021, we entered into a Supply Agreement with Auris Health, Inc. On May 5, 2022, the parties mutually agreed to terminate the Supply Agreement. 40 Item 9 . Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. None.